Alabama

Austal, General Dynamics part ways on LCS

(Photo courtesy of General Dynamics)The littoral combat ship Independence is seen during a stint in the Gulf of Mexico during builder's trials.

MOBILE, Ala. -- Austal USA and General Dynamics Corp. said Thursday that they're parting ways in the competition to build littoral combat ships for the U.S. Navy, a move that could give both sides advantages as they seek future contracts.

The split means Austal will bid as the lead contractor to build as many as 10 of the ships in the next four years, work that could be worth $4.8 billion or more.

"It's time for us to be our own boss on the LCS, and we're ready to do that" said Joe Rella, Austal president and chief operating officer.

Falls Church, Va.-based General Dynamics has been the lead contractor on the first two LCS won by the team, even though the American unit of Henderson, Australia's Austal Ltd. has been building the ships on the east bank of the Mobile River.

The LCS is a cutting-edge warship designed to sweep mines, chase pirates and perform other missions in shallow, coastal waters. By July, the Navy says it will choose between Austal's aluminum tri-hulled design and a more traditional steel-hulled vessel offered by a Lockheed Martin Corp. team.

The split, which the teams said the Navy approved, could help Austal build cheaper ships. That's no small concern, given Navy statements that cost will be a top selection criteria

Rella declined to comment on whether the split would lower Austal's costs, citing competition. He did say the firm might have to add to its 1,000 Mobile employees to handle prime contractor duties if it wins.

Some or all workers at General Dynamics' site in Chickasaw could eventually lose their jobs or be transferred back to Maine, said Jim DeMartini, spokesman for General Dynamics' Bath Iron Works.

In 2012, the Navy plans to take bids on five more ships of the winning design. That competition will be open to all shipyards except the first-round winner.

For General Dynamics, the divorce means that its Bath, Maine, shipyard can bid in 2012, no matter who wins the initial LCS derby.

"We fully expect, regardless of which hull the Navy chooses, that we'll compete for the fiscal year 2012 ships," said DeMartini.

For Austal, "I think it gives them a lower cost structure moving into the final phase of the competition -- they won't have to carry Bath Iron Works' overhead to the extent they had," said Jay Korman, an analyst who tracks the LCS program for the Avascent Group in Washington, D.C.

Korman said that General Dynamics' experience with Austal, plus its history of building steel ships, puts it in good position to win work.

"GD clearly made the calculation that they are better off -- meaning, they could get more money -- out of going it alone as the second source down the road than continuing to share the program with Austal," Korman said.

Austal might consider building steel-hulled ships if it loses, but Rella said "steel-hulled construction is not our core competency."

Rella and DeMartini said the dynamics of their firms' LCS partnership changed when the Navy released its plan to choose one design. That meant if the Austal/General Dynamics team won, it was unlikely that any ships would ever be built in Maine, DeMartini said.

"It fundamentally changed the construct of our business relationship with Austal," he said.

Austal wasn't even qualified to act as a prime contractor for the U.S. military when work began on the USS Independence, the first LCS built in Mobile. But that changed in 2008, when Austal won a $1.6 billion deal to build up to 10 military transports called joint high speed vessels.

General Dynamics will remain the prime contractor for the future USS Coronado, scheduled to be delivered from Mobile in May 2012.

Rella declined to say whether any money changed hands as part of the split. No payments were disclosed in a filing Austal made to the Australian Stock Exchange.

Austal would still contract with an arm of General Dynamics to design and test LCS systems, including computers, communications, navigation, aviation and weapons on future vessels.

(Press-Register Political Editor George Talbot contributed to this report.)